Charge a Default Rate on Construction Loan?

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Question:

Can the bank charge a default rate on a single-close, construction-perm mortgage loan during the construction phase if construction is not completed on time? For example, a 9 month construction term with multiple draws has a fixed interest at 4.125%. If construction is not completed at 9 months when the construction phase is to mature a default rate of 4.625% would apply from the maturity of that phase. If it is permissible, does this make the loan an ARM or the increased rate a refi?

Answer:

by Randy Carey:

This is a legal question and not a compliance question. Most banks would just renew the loan rather than let it sit in default and thus have to report it past due for the customer and for call reporting. Having a different default rate does not create an ARM loan.

Answer:

by Richard Insley:

It's not clear if this question relates to Reg.Z, but if so, the answers to questions like this boil down to Section 1026.17(c)(1): "The disclosures shall reflect the terms of the legal obligation between the parties." The only way post-default provisions should enter your TIL disclosures would be if you required the borrower to default!